Powell says U.S. economy can handle the additional rate hikes that are coming

Powell told the lawmakers that the central bank is committed to bringing inflation down and that additional rate hikes are coming. He said that only the size of the upcoming moves has not been decided.

“We anticipate that ongoing rate increases will be appropriate; the pace of those changes will continue to depend on the incoming data and the evolving outlook for the economy,” Powell said.

“We will make our decisions meeting by meeting, and we will continue to communicate our thinking as clearly as possible,” he added.

The Fed has already raised its benchmark interest rate by 1.5 percentage points since March, the fastest pace in decades, as it tries to quickly get rates back to a more normal level after two years of ultra-low levels close to zero to support the economy during the pandemic.

Powell signaled last week that the Fed would be choosing between a 50 basis point move or a 75 basis point move at their July 26-27 meeting. That would move its policy rate close to 3%.

Projections released last week show the median forecast of Fed officials sees the benchmark rate will peak just under 4% next year, although some officials expect rates to go above that level.

Powell told lawmakers that inflation has surprised the central bank.

“Further surprises could be in store,” he said.

“Aggregate demand is strong, supply constraints have been larger and longer lasting than anticipated, and price pressures have spread to a broad range of goods and services,” Powell said.

“The surge in prices of crude oil and other commodities that resulted from Russia’s invasion of Ukraine is boosting prices for gasoline and fuel and is creating additional upward pressure on inflation,” he added.

Measured by the Fed’s favorite gauge, the personal consumption expenditure price index, headline inflation is running at a 6.3% annual rate in April, while the core, which excludes volatile food and energy prices, is up 4.9%.

Powell said that early indicators show that core inflation “likely held at that pace or eased slightly” in May. The government will release the May PCE data on June 30.

“We have both the tools we need and the resolve it will take to restore price stability on behalf of American families and businesses,” Powell said.

Senators unanimously expressed concern about inflation.

“Inflation is hitting my people so hard, they are coughing up bones,” said Sen. John Kennedy, Republican of Louisiana.

Sen. Elizabeth Warren, a Democrat of Massachusetts, said she was concerned that the Fed’s plans for additional rate hikes was the wrong medicine to combat inflation and “might drive this economy off a cliff.”

Powell said that a recession was “certainly a possibility,” but not the intended consequence of monetary policy moves.

“We’re not trying to provoke and don’t think that we will need to provoke a recession,” Powell said.

Krishna Guha, vice chairman of Evercore ISI, said Powell is being hawkish “but less so than could have been the case.”

Perhaps reflecting this sense, U.S. stocks DJIA, 0.70% SPX, 0.62% were higher on Wednesday adding to strong gains from the prior session.

The yield on the 10-year Treasury note TMUBMUSD10Y, 2.894% moved down 13 bp to 3.14%.